Four risks for Australian investors

This quarter we explore four major risks facing Australian investors. After initially outlining what these risks are, we provide an indication of how they impact investment markets and what you can do to accommodate these risk within your investment planning and strategy initiatives.

The risks as we see them;

Chinese Hard Landing. China is continuing its economic transition from capital investment to service and consumption driven growth. This transition will see China’s GDP steadily reduce from its current (reported) levels of nearly 7% in 2015 – to closer to 4% by the end of the next decade. Should this occur sooner than expected (i.e. a ‘hard landing’), then global markets will retract sharply and the AUD (a proxy currency to the illiquid Renminbi) will fall significantly (to as low as 0.50 USD).

New normal of low global GDP and Interest Rates. For the umpteenth time, the IMF has downgraded their growth expectations for the global economy. Markets hardly reacted being somewhat immune to the IMF’s optimism. The developed world appears highly likely world to have settled into a ‘new normal’ of lower GDP and lower interest rates.

A decline in Australian property. Australian property has performed very strongly through to year end 2015. Its investment prospects (particularly in capital cities) are less favorable in the medium term future. An expected increase of supply could trigger a decline in property value or at least flat capital valuation prospects in the medium term. Particular risk occurs in overheated Sydney and Melbourne markets

Lack of tax reform. A more productive tax mix would enhance business confidence and increase productivity. Unfortunately, changes to the GST are off the table and with it goes a cut in the corporate tax rate. Stamp Duty, the most inefficient of all taxes seems to have been ignored and any government that proposes to extinguish the Capital Gains Tax discount will fall squarely on their sword. With a weak Labor opposition, the Turnbull government appears to plan on getting by without proposing any real tax reform initiatives.

Investment strategies to manage these risks

What to expect if this risk plays out and how you can manage your investments to mitigate these risks.

Chinese Hard Landing. (Probability Low-Medium) If this occurs, equity markets will retract globally. International exposures will be better placed to provide relative value as a currency hedge against AUD depreciation. International fixed interest exposures provide best chance of capital growth in this scenario.

New normal of low GDP and Interest Rates. (Probability High) As the world adjusts to a low interest rate and below trend GDP environment, there will be a flight to safe haven currencies. Maintaining investment exposures (equity and fixed interest) in GBP and USD will generate value if this risk plays out. Additionally, inflation linked bonds are well placed to insulate additional risk should low rates (maintained to curb economic weakness) result in higher inflation.

Australian property crash. (Probability Low) Investment lending leverage restrictions and a reduction in availability of capital (both macro-prudential interventions) on banks has assisted in reducing risk of a property crash occurring. Australia’s banks remain heavily exposed to residential property. If much of your wealth is in property and you happen to have a large exposure to banks, you are doubly layering your exposure to this risk. It may be prudent to consider reducing your exposure to banking stocks.

Lack of tax reform.(Probability High) For the first time in many generations, there is a real chance that the next generation may have a lower standard of living than that of their parents. Continued deficits, inefficient tax mix and poorly controlled public spending will burden future generations for many years to come. The lack of progress in addressing tax reform impedes productivity improvements and reduces the government’s ability to utilise fiscal policy to address the economic needs. Weighting your portfolio towards international exposures will assist in avoiding systemic risk resulting from Australia's governance.

If you are interested in revisiting your investment portfolio construction and/or strategy, do not hesitate to contact us.

The Latest from Snowgum Financial Services

This quarter, Snowgum’s Principal Adviser Matt Vickers presented alongside Ian Irving from the ASX on the broad topic of retirement and investment planning to members and guests of the Ku-ring-gai Chamber of Commerce. The event was very well attended with a vibrant panel discussion concluding what was an enjoyable and (hopefully) enlightening evening for members and guests. Special thanks to Kathryn Maguire at the Chamber for organising such a great event.

As part of our ongoing regular communications, Snowgum Financial Services featured in Money Management’s lead article last week on a discussion around the changing nature of the wealth management industry. If interested, you can view the article and our views here.

On a lighter note, Matt Vickers represented Snowgum Financial Services and their AFSL holder in the Kur-Ring-Gai Chase fun run, in support of the Special Olympics. It was a great day for a morning run in leafy Wahroonga and, despite feeling the effects of Saturday night catch-up with school friends, Matt managed to nab 2nd place in the 4.5km category.

Please feel free to share this economic and market update with any party that may be interested.

Any advice contained on this update is of a general nature only and does not take into account your circumstances or needs. You must decide if this information is suitable to your personal situation or seek advice. Prior to investing in any particular product, you should read the Product Disclosure Statement.